South Africans to live longer – which can cause a problem

South Africans are set to live longer, but this could prove to be a problem for retirement savings in the future.

According to Discovery Invest CEO Kenny Rabson, advances in medicine have sparked a longevity revolution, with people living much longer than before.

Although this is a cause for celebration, it does provide a concern when it comes to planning for retirement.

Rabson said that Discovery Vitality clients, on average, live to 83 years, which is nearly double the life expectancy seen in England in the mid-19th century.

That said, living longer does not necessarily mean living well for longer. Lifespans may be improving but health spans, the years that South Africans remain healthy and active, are not increasing at the same rate.

This can have significant consequences not only for quality of life but for the affordability of retirement.

“If a client is sicker during their earlier years of retirement, they will typically have three times more out-of-pocket medical expenses, which can significantly impact their retirement fund,” said Rabson.

The financial realities of a longer life can also not be ignored, as this can impact a retiree’s replacement ratio – the income needed to maintain their lifestyle in retirement.

“If a client lives five years longer than expected, their replacement ratio can fall below 50%, creating a serious challenge to maintaining their lifestyle in retirement,” said Rabson.

“It’s a complex advice spectrum that advisers must navigate, balancing health, longevity, and finances.”

He added that the complexities require a strategy that combines global investment expertise and scale, powerful technology, behavioural incentives and insights, and a nuanced understanding of the evolving realities of longevity.

He said that these elements work together to help retirees achieve the “gold standard” of retirement planning.

Not just age

Rabson also noted that people are largely not rational beings with biases, including loss aversion, short-termism, overconfidence, hyperbolic discounting, and herd behaviour, playing a significant role in decision-making.

He said that these tendencies can lead individuals to make choices that undermine their financial well-being, especially when regarding saving and investing for retirement.

Hyperbolic discounting, for example, refers to the tendency to greatly prefer smaller, immediate rewards over larger, delayed ones.

This can include spending a bonus on a holiday instead of investing, even if the latter’s compound interest would grow the bonus into a far larger sum.

Hyperdiscounting can have a profound impact on retirement savings.

Rabson provided an example of an investor aiming for a replacement ratio of 75% of their pre-retirement income by age 65

If they start saving at 20, that individual would need to put away about 13% of their income each month.

Delay this to 30 and the ratio climbs to a much more demanding 22% of their income.

At 40, this goal is practically impossible to achieve the desired outcome as the required contributions become impractically high.

Another common issue with retirement thinking is that people act with perfect knowledge.

However, the reality of saving shows a vast, volatile and complex world.

“Everybody knows how complex investment markets are,” said Rabson,

With more than 140,000 funds available globally, “it’s incredibly difficult for financial advisers to navigate
such a complex world. And, of course, that’s all compounded by local regulation”.

Heightened market volatility and fear of underperformance have led to a more conservative investment approach among many local investors.

“Since 2017, people have put their money into income funds rather than balanced funds, equity funds, et cetera.”

“While this made some sense during periods of higher interest rates, it also meant that many clients missed out on the gains of the recent bull market, both locally and abroad.”

This cautious approach may limit investors’ ability to fully capture the benefits of a diversified and globally exposed portfolio.

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